CA Komal S. Chhabra

Jaitley presented his third budget on Feb 29, 2016 amidst a global slump with lower commodity prices, slackening of China’s economy, volatile exchange rates and outflow by FIIs. He has been not drastically increased public spending and has been committed to maintaining a fiscal deficit of around 3.5% of India’s GDP. Most of the allocations have been diverted towards rural and agriculture sector in addition to infrastructure projects i.e. roads and transportation. On the tax front, Jaitley has attempted to slowly abolish the myriad of incentives and exemptions. Contrarily, the Finance Minister has introduced tax benefits for startups, real-estate and new manufacturing companies. However, these benefits are not as bold as expected and may not foster industry growth radically as was expected from this budget. On the personal tax front, few unpleasant surprises of taxing retirement benefits, new dividend tax for individuals, increased surcharge from 12 to 15% for HNIs. Coming to indirect tax, 13 different cesses earlier levied by various ministries have been abolished, but an additional Krishi Kalyan cess of 0.5 per cent has been imposed increasing service tax to 15% and an infrastructure cess up to 4 per cent on specific motor vehicles was imposed making the “so-called” luxury good expensive.

Here’s what the impact of the budget on different sectors looks like:

Real Estate

There is a positive impact on “Real Estate” and specifically the affordable housing projects. Tax incentives on additional interest deduction for first home buyers, profit-linked deduction for affordable housing developers, service tax exemption for such developers and DDT exemption for REITs.

Financial Sector

Moving to Banking”, an allocation of Rs. 25,000 crores perhaps would fall short for the PSU banks stressed balance sheets. Finally, a long pending matter has been brought to rest by granting the NBFCs a breather of allowable deduction of 5% of its income in respect of provision for NPAs.

Manufacturing

FM has attempted to boost the growth in “manufacturing sector” by giving the new manufacturing setups an option to choose concessional tax rate of 25%+surcharge without option for any profit-linked and investment-linked incentives. This move of the FM appears contradictory on various fronts. In the last budget, he committed to reducing the tax rate for corporates to 25% over four years and phase out the investment-linked and profit-linked exemptions. What he essentially did this year is introducing sunset clauses for the tax incentives and reduce the tax rates for SMEs by 1%. What was truly expected was a reduction in tax rates not just for SMEs but rather for all the Corporates. There should have been a level playing field not just fresh investments, but all existing companies across sectors.

Special Economic Zones

Another disappointment has been the tax incentives for SEZs. Development of new Special Economic Zones has been sluggish over the past few years owing to several factors both global and domestic. The icing on the cake had been Dividend Distribution Tax and Minimum Alternate Tax for these SEZs. It would have been a good move to rather reinstate the existing exemption through the removal of minimum alternate tax and dividend distribution tax, that would have immensely boosted both developers and the units. The budget has been consistent on phasing out exemptions, but not truly about extending the tax rate cuts across corporates.

Talk of the town – “startups”

To promote innovation and entrepreneurship, the budget pronounced incentives for startups, including allowing 100 per cent deduction of profits for three out of five years for startups set up during April 2016 to March 2019. Individuals and Hindu Undivided Family (HUF) setting up start-ups by deploying capital gains from sale of residential property will also get tax relief. Capital gains will not be taxed if invested in regulated/notified Fund of Funds and by individuals in notified startups, in which they hold majority shares.

Dishearteningly the lure of profit deduction was dampened by a levy of Minimum Alternate Tax on the startups that would lead to cash-outflow for the already cash-crunched startup balance sheets. I am also surprised by the tenure of the tax holiday. There would just be a handful of startups who would actually make large profits in the initial three to five years of their incorporation. I believe that there is a need for some real and meaningful reforms for the entrepreneurs. The least they could do was not levy MAT and increase the tax holiday period or considerably lower the tax rates. Crafting an implementable strategy to realign tax rates and incentives, without causing a commotion in the investment cycle and existing business cycle, is going to be a tightrope walk. And, it is not just about creating a good tax environment for startups but also about bringing in measures that will build a sustainable and friendly eco-system for entrepreneurship and innovation.

Limited Liability Partnership

On one hand the Government has allowed FDI in LLPs without FIPB approval and on the other they have imposed an additional restriction on conversion to LLP of having asset value of less than Rs. 5 crores.

Ease of doing business

This year’s budget has introduced the much wanted amendments such as stay of demand on payment of 15% of disputed amount, non-applicability of MAT for foreign companies not having a PE in India, alternative documents for PAN for non-residents, dispute resolution mechanism, investment allowance, revision of scheme of penalty, period of long term capital gain in unlisted shares reduced to two years. These amendments are quite welcoming and would iron out the earlier inefficiencies.

What was missing on the income tax front?

The budget missed out on rationalizing some long litigable matters. The transfer pricing regime, especially trivial matters such as classification of income/expense as operating/non-operating, related party filters such as turnover filter, related party transaction filter, loss making and so on. Secondly, Safe Harbour Rules received a lukewarm response since the time it was introduced. There have been several reasons for it including high margins, lack of clarity on categorization of services and restriction of safe harbor only to the IT sector. Thirdly, Section 40(a)(ia) of the Act provides for disallowance to the taxpayer for non-deduction of tax deducted at source from payments to residents of 30% of expenditure amount. Whereas similar benefit is not available under Section 40(a)(i) of the Act where the payments are made to non-residents. Also, lack of clarity on claiming balance additional depreciation if assets are capitalized in the second half of the year.

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